A late rally has helped the S&P 500 snap a four-session losing skid with investor focus turning to a key report on the labour market.
Stocks had been solidly lower for most of the session after data showed weekly jobless claims fell more than expected to a two-month low last week and lay-offs dropped in August, giving the Fed a cushion to continue raising rates to slow the labour market.
Investors now await the monthly non-farm payrolls report on Friday for more evidence on the labour market.
Economists polled by Reuters expect a jobs increase of 300,000 while Wells Fargo economist Jay Bryson revised his forecast for non-farm payrolls to 375,000 from 325,000 and Morgan Stanley economist Ellen Zentner expects August payrolls of 350,000.
"Today's market is about tomorrow morning. You've got a market that is oversold... and a catalyst for a rally or at least not to sell off would be a weaker employment report especially with regard to wages," said Quincy Krosby, chief global strategist for LPL Financial in Charlotte, North Carolina.
"The market is as data-dependent as the Fed. It's going to be on guard for every data release that could suggest when the Fed could be closer to finishing."
The S&P managed to bounce in the latter stages of trading after hitting a low of 3,903.65, near what some analysts see as a strong support level for stocks at 3,900.
The Dow Jones Industrial Average rose 145.99 points, or 0.46 per cent, to 31,656.42; the S&P 500 gained 11.85 points, or 0.30 per cent, to 3,966.85; and the Nasdaq Composite dropped 31.08 points, or 0.26 per cent, to 11,785.13.
The benchmark S&P index has stumbled nearly 6.0 per cent over the prior four sessions, which began after Fed Chair Jerome Powell signalled on Friday the US central bank will remain aggressive raising rates to fight inflation even after consecutive hikes of 75 basis points, a message echoed by other Fed officials in recent days.
Despite the gains, the tone was defensive, with healthcare up 1.65 per cent, and utilities, which gained 1.42 per cent, the leading sectors to the upside.
Weighing on the tech sector, down 0.48 per cent, were chipmakers as the Philadelphia semiconductor index dropped 1.92 per cent, led by a 7.67 per cent tumble in shares of Nvidia as the biggest weight on the S&P 500 and a 2.99 per cent fall in Advanced Micro Devices after the United States imposed an export ban on some top AI chips to China.
Other economic data showed a further easing in price pressures while manufacturing grew steadily in August, thanks to a rebound in employment and new orders.
Traders expect a 73.1 per cent chance of a third straight 75 basis points increase in rates in September and expect it to peak around 3.993 per cent in March 2023.
The expected path of Fed rate hikes has increased worry the central bank could potentially make a policy mistake and raise rates too high, tilting the economy into a recession, even if inflation shows signs of abating.
Investors have also become more concerned about corporate earnings in a rising rate environment that has also stoked a rally in the US dollar.
Hormel Foods Corp fell 6.56 per cent after the packaged foods maker cut its full-year profit forecast.
Volume on US exchanges was 11.19 billion shares compared with the 10.51 billion average for the full session over the last 20 trading days.
Declining issues outnumbered advancing ones on the NYSE by a 2.82-to-1 ratio; on Nasdaq, a 1.96-to-1 ratio favoured decliners.
The S&P 500 posted one new 52-week high and 35 new lows; the Nasdaq Composite recorded 29 new highs and 356 new lows.